AIM.TO - Aimia

[Pref User]

If I'm Mamdani I think I would love it to get common, it's way more liquid than the preferred shares. In the most liquid preferred it would take over a year to exit and almost two at the extreme, based on current average volume this would drop down to 59 days.

 

Earlier I showed what his dividend adjust cost base is. If he got face value in share and was truly looking to get out and not vote at all he could liquidate his position at half the current market price and be breakeven on the investment. If would be hard to clear all of the shares so the price might go down, and then management risks Mittleman scooping up more shares at a much lower price.

 

But you're right this should be very interesting to play out.

 

[Pref User]

Also rereading that line in the prospectus for the series 3 that sounds to only be with regards to dividends, so maybe they cannot go nuclear on them.

[Cigarbutt]

Cardlytics, FORM S-3  REGISTRATION STATEMENT, filed today

We'll have to wait for the supplement but there is a possibility that the 2.98M shares held by Aimia will be part of the 4M shares offered by the selling shareholders.

https://www.sec.gov/Archives/edgar/data/1666071/000119312519204123/d771079ds3.htm

 

[wabuffo]

Nice find - it does look like this S-3 sets the stage for a sale of CDLX stake by AIMIA.

 

wabuffo

[wabuffo]

Per Canadian Insider, it looks like Mittleman Bros sold 2m AIMIA shares last Thursday.  It's been drip, drip, drip selling by them but this got my attention.  I know their fund has had poor returns over the last year or so - so is this redemption-related?  They could've met redemptions by offering their investors a chance to participate at the tender at $4.30 per share - now they are forced sellers at $3.70 or so.

 

They still have a large stake but I wonder if their hand is weakening...

 

wabuffo

 

[wabuffo]

I didn't realize Mittleman Bros investment record was this poor.

http://www.mittlemanbrothers.com/performance/

 

A 5-year CAGR of minus 6.7% per year (vs S&P 500 TR CAGR of +10.7% annually). They've been underperforming by 17%+ per year!.  No wonder he's seeing redemptions after his investors got their Q2 statements in July.

 

The 2m share sale was on July 31st - that was the beginning of the market reaction to the escalation of the trade war.  We'll see what happens with their AIM share holdings this week with the sudden tailspin in the broad indices.  The AIMIA BOD may only need to wait him out and he may no longer be a pain in their side. 

 

If I were Rabe and BOD, I'd be publicizing MIM's poor performance and asking why AIM shareholders should entrust the Company's strategy to someone with such a poor investment record.  Ouch!

 

wabuffo

[movys]

How intellectually honest of you to mention only the 5-year CAGR when it suits your narrative and ignore the 10-year CAGR that tells the opposite different story or the 17-year (since inception) number that does the same.

 

Do the math on how much more money you end up with when you outperform by several hundred basis points over such a long period of time.  Investors who have stuck with MIM have done very well.

 

 

[Cigarbutt]

The Mittleman group's presence is interesting because they represent a potential catalyst for value realization.

What specific individuals think about their investment record and potential for a 'rebound' is not that relevant in the context of the redemption pressure that the Mittleman team may get for their funds and the effect this may have on Aimia's share price, given such a high concentration in one name. A cynic may say that this would be value accretive for the buyback but waiting for windows of opportunity has a price also.

 

You know a fund manager is going through 'challenging' results when the commentary starts with: "“Now, just remember that this thing isn’t as black as it appears.” — George Bailey, It’s a Wonderful Life

 

It's a wonderful life but Revlon is reporting tomorrow.

https://www.brookvine.com.au/wp-content/uploads/2019Q2_Mittleman-Global-Value-Equity-Fund_Qtrly-Report_Class-P.pdf

[wabuffo]

How intellectually honest of you to mention only the 5-year CAGR when it suits your narrative and ignore the 10-year CAGR that tells the opposite different story or the 17-year (since inception) number that does the same.

 

I didn't ignore their long-term record, but I don't think its particularly impressive - for two reasons:

 

1) When I look at the early year results of an investment manager's record, I always assume the AUM was a whole lot smaller - so on a time-weighted, capital-weighted average return basis, I'm guessing most of their limited partners have not outperformed the indices.

2) Even if ignore point 1, I ran their numbers from 2003 through a six-sigma calculation correlated with the side-by-side S&P returns and looked up the result in my handy-dandy z-table.  Their portfolio returns statistically beat 54% of random portfolios based on the S&P.  That's only a bit better than a coin toss.  Statistically their returns are mostly leveraged beta and very little alpha over the entirety of their record.

 

But my point wasn't to take shots at them.  My main point is that their position may be weaker than appreciated by AIM investors.  Unless a lot of their AUM is their own money, their recent poor record plus current swoon in equities could force their hand by their own investors.

 

But I understand your concern about my post.

 

wabuffo

[Pref User]

How intellectually honest of you to mention only the 5-year CAGR when it suits your narrative and ignore the 10-year CAGR that tells the opposite different story or the 17-year (since inception) number that does the same.

 

I didn't ignore their long-term record, but I don't think its particularly impressive - for two reasons:

 

1) When I look at the early year results of an investment manager's record, I always assume the AUM was a whole lot smaller - so on a time-weighted, capital-weighted average return basis, I'm guessing most of their limited partners have not outperformed the indices.

2) Even if ignore point 1, I ran their numbers from 2003 through a six-sigma calculation correlated with the side-by-side S&P returns and looked up the result in my handy-dandy z-table.  Their portfolio returns statistically beat 54% of random portfolios based on the S&P.  That's only a bit better than a coin toss.  Statistically their returns are mostly leveraged beta and very little alpha over the entirety of their record.

 

But my point wasn't to take shots at them.  My main point is that their position may be weaker than appreciated by AIM investors.  Unless a lot of their AUM is their own money, their recent poor record plus current swoon in equities could force their hand by their own investors.

 

But I understand your concern about my post.

 

wabuffo

 

BURN!!!!

[kab60]

MIM letter out with thoughts on Aimia: https://www.brookvine.com.au/wp-content/uploads/2019Q2_Mittleman-Global-Value-Equity-Fund_Qtrly-Report_Class-P.pdf

[wabuffo]

CDLX (Cardlytics) out with a good earnings report that the market seems to like - up ~15% in early trading this morning.  So that's good news for AIMIA.

 

wabuffo

[wabuffo]

I (again) became an AIM.TO shareholder bagholder after today's price swoon.  Of course, that means this thing is heading a lot lower and I will probably regret this little speculation.  8)

 

wabuffo

[Cigarbutt]

Q2 results out.

 

The message is that management is engaged (for better or for worse) in the transformation of their operating platform. They expect negative cash drag to go down but it’s only a promise at this point and “accretive” acquisitions will decrease the level of cash and investments held (and margin of safety).

 

In Q2 and since then, the market value of Cardlytics has gone up (I would suspect they’re also doing well with their long-term bonds) and I do not take these numbers in today’s valuation although monetization may be coming soon and hopefully they can achieve an exit at an attractive price point.

 

Another key part of the puzzle is PLM. PLM is going through a relative soft patch but the underlying business appears to be strong and growing. Adjusted EBITDA increased to 21.3M USD last quarter. One has to reasonably subtract to intrinsic value based on the setup but I continue to think that there is a considerable gap between what is reported (53.2M) and what the business is really worth.

 

Margin of safety wise, looking at total equity (579M) at end of Q2, subtracting 20M for the completion of the NCIB, subtracting 322M for the prefs and ‘adjusting’ for unrecognized value for PLM and BigLife, I get a ‘floor’ at about 5$ per share (shares outstanding now at about 108.5M). Going forward, there will be a continuous negative cash flow drag from operations and dividends to preferreds (which will continue to cause a 40% tax accrual to grow because of part VI.1 and unprofitable operations for the foreseeable future) but this drag will be mitigated partly by interest income and distributions from PLM.

 

All in all, I was hoping for more immediate value realization but am still comfortable holding on for now.

[movys]

I don’t think anyone expected any immediate value realization with Q2’s report.  Also not a surprise that mgmt is engaged in the transformation of their operating platform.

 

Curious how you are  “adjusting” your value for PLM in your all-in “floor” of $5/share?  Was nice to hear Rabe confirm that There’s a robust exclusivity clause in their agreement with Aeromexico.

 

Also doesn’t sound like they are close to announcing any kind of M&A, which is good as it allows some time for the boxing match with Mittleman to play out before mgmt can destroy more value.

 

Finally, is there a chance mgmt actually  finds a real bargain and creates a ton of value by putting the NOLs to work?

[wabuffo]

Oh man - they are incinerating cash at a blistering pace!  Not counting the share buybacks, they torched $1/share in cash in Q1 and $0.55/share in cash in Q2.  But look at that adjusted EBITDA improvement! LOL!

 

They are not building a good negotiating position for themselves vis-a-vis Aeromexico.  If Aeromexico stops the divie from PLM - these bozos are in trouble.

 

I just don't understand the strategy here.  The buybacks were unnecessary, the payment of dividends and restarting the preferreds was unnecessary.  I'm not sure why they haven't shutdown ILS yet with its cash operating losses.  SMH.

 

wabuffo

 

 

 

 

[Cigarbutt]

I don’t think anyone expected any immediate value realization with Q2’s report.  Also not a surprise that mgmt is engaged in the transformation of their operating platform.

 

Curious how you are  “adjusting” your value for PLM in your all-in “floor” of $5/share?  Was nice to hear Rabe confirm that There’s a robust exclusivity clause in their agreement with Aeromexico.

 

Also doesn’t sound like they are close to announcing any kind of M&A, which is good as it allows some time for the boxing match with Mittleman to play out before mgmt can destroy more value.

 

Finally, is there a chance mgmt actually  finds a real bargain and creates a ton of value by putting the NOLs to work?

Gentle reminder: conceptually, it seems we are on the same side of the transaction. It's just we don't sit at the same place in the spectrum. Just read wabuffo for the bozo end of the spectrum. :)

 

In 'normal' circumstances, PLM's value would be much higher. However, I would challenge you to disclose a specific intrinsic value number without a huge range of potential outcomes. So the 'floor' value is very relative. Why? The PLM evolving saga is different for reasons described earlier in this thread but I remember clearly a time when (it was Mr. Duchesne at the helm then) Aeroplan without Aimia was considered unimaginable and submit that they should have had more imagination. Also, you seem to anchor (correct me if I'm wrong) PLM's value to Mr. Mittleman's assessment and it's interesting to note that, for the Aeroplan franchise, he was way wide of the mark for reasons (retrospectively appreciated for some) that are difficult to reconcile with a rational approach.

 

I agree with you on the potential upside but wonder if time is your (our) friend here.

 

 

[movys]

Simply citing the reported cash burn during Q1/Q2 as Wabuffo does above is misleading.  ~$65m of the negative FCF in Q1 came from the one-time dividend used to make whole the old common shareholders.  $24m of the negative FCF during Q2 (almost half the total) came from a one-time $24m payment to HSBC to cover the existing points liability on Air Miles Middle East and was well-telegraphed last quarter.  Finally, another $19 negative FCF came from an unfavorable working capital swing due to more one-time payments and timing of cash receipts.  So that's $109m in negative FCF that has already stopped bleeding out and can be ignored going forward.

 

Generally speaking, I think time is probably not on our side here and this is a race against the clock to the extent that they continue to burn cash.  So the big pieces you have to get right here, IMO, are PLM and the rate of continued cash burn.

 

On PLM, I'm curious what basis anyone feels there is for Aeromexico to "just stop paying the div" to Aimia.  They are contractually bound.  And even if Aeromexico decided to risk a lawsuit by withholding cash that rightfully belongs to Aimia, there's is $400m in cash on Aimia's balance sheet it can use to weather the storm before it eventually collects what it is entitled to from PLM.  We have already seen Aeromexico roll out the Air Canada playbook by making an opportunistic bid for PLM when it thought Aimia was vulnerable.  Now that Aimia's balance sheet is so much stronger, I don't know what Aeromexico thinks they will be able to accomplish.  There is no ticking clock on the PLM partnership and it just continues to compound value.  So where's the leverage?  Aimia has told me Aeromexico hasn't even explained what the alleged "irregularities" are and they have no idea what Aeromexico is talking about.  It sounds an awful lot like opportunistic negotiating tactics.  If Aeromexico were going to go nuclear and try to withhold the div, wouldn't they have done that by now?  Hell, even if they kill the div temporarily, Aimia has a $134m stake in Cardlytics it can monetize anytime (shelf registration statement was recently filed).

 

On the cash burn going forward, let's punitively assume negative FCF will be the same as Q2 in both Q3 and Q4, which is ($32m), excluding one-time payments during Q2.  Going forward, we will see the following during H2:

 

1) $12m from PLM

2) $14m from working capital unwind ($5m in cash receipts that were pushed into july and $9m from the absence of incentive/insurance payments that happened during Q2)

3) $5m? from headcount reduction benefits

4) ($8m) in preferred divs

5) ($10m) in one-time IT spend to reduce long-term IT costs

 

So ($64m) cash burn in H2 plus all the above adjustments gets you $50m in negative FCF for the remainder of 2019.

 

My valuation assumptions:

- PLM: 9x H1 annualized EBITDA = C$485m in value to Aimia

- Cardlytic stake at current quote: C$134m

- Think BIG Digital Air Asia: ascribe zero value even though it has 16m members

- C$396m cash less C$102 restricted cash plus C$65m restricted cash release (expected in 2019 re CRA Tax Audit) less C$21m post-quarter NCIB purchases = pro forma cash of C$338m

- less C$317m preferred shares

- less C$50m cash burn

 

= C$590m / 108.5m shares

 

C$5.43/share

 

What is the right multiple for PLM?  How should we discount it given the current dynamics?  I don't care what Mittleman thinks and I don't know what the right multiple is, but I think 9x is conservative.  What would you pay for a rapidly growing, high-ROIC business with negative working capital and tax advantages that continues to dividend its excess "float" to you as income?  If PLM were a public company I think it would fetch north of 10x.

 

My cash burn estimates may be a off a little bit and they will probably burn a little in 2020 as well, but it shouldn't move the needle either way.  Offsetting that uncertainty I ascribe no value to Think BIG Digital (AirAsia) or the NOLs, so call it a wash.  Bottom line, current price seems to be discounting all the terrible things than could go wrong and therefore offer a free option on any one of them going right.

 

Happy to hear thoughts/pushback on the above.

[wabuffo]

Simply citing the reported cash burn during Q1/Q2 as Wabuffo does above is misleading.  ~$65m of the negative FCF in Q1 came from the one-time dividend used to make whole the old common shareholders.  $24m of the negative FCF during Q2 (almost half the total) came from a one-time $24m payment to HSBC to cover the existing points liability on Air Miles Middle East and was well-telegraphed last quarter.  Finally, another $19 negative FCF came from an unfavorable working capital swing due to more one-time payments and timing of cash receipts.  So that's $109m in negative FCF that has already stopped bleeding out and can be ignored going forward.

 

Movys - here is the core cash flow from the operating business (I'm excluding dividends, the one-time payments you mentioned, etc).

 

  http://i67.tinypic.com/wbt0k2.jpg

 

The management team has burned over $100m in the first two quarters post-Aeroplan divesture ($136m if include the 'one-timers', but whatever).  I don't for one second, believe this run rate is suddenly going to zero anytime soon.  This is because they generate very little revenue and have a huge, fat corporate overhead that no one is paying for right now. 

 

They still have to downsize - and guess what, that'll bring more one-time cash outflows to exclude from future analyses.  This has always been my beef with all of the sum-of-the parts analyses.  They all ignored: 1) the ongoing, massive cash burn and 2) the significant one-time exit costs to get rid of the worldwide offices and expensive marketing staff.

 

I've got a small position that I bought last week, so obviously, I am not disagreeing that there isn't some value here.  But the degrees of freedom are shrinking fast and no help is coming from Mittleman or anyone else.

 

wabuffo

[Cigarbutt]

This investment fits in the potentially dwindling margin of safety, absence of clear catalyst and cash burn in the meantime category.

 

It reminds me of what Mr. Peter Cundill, the regretted and perhaps not well known enough value investor who had described his approach to these kinds of opportunities. In There's always something to do, he mentions an example of a mistake where he had bought a company with valuable assets but which had a cash-losing sub which, in the end, ate away the margin of safety.

 

It often pays to buy into uncertainty but there does not appear to be, for now, an obvious catalyst. So, for now, buy them cheap and something good will happen? is the mantra.

 

A quote from Mr. Cundill:

"“One of the dangers about net-net investing is that you buy a net-net that begins to lose money, your net-net goes down and your opportunity to be able to make a profit becomes less secure. So the trade is not necessarily to predict what the earnings are going to be but to have a clear conviction that the company isn’t going bust and that your margin of safety will remain intact over time”.

 

As far as the Mittleman group, their major holdings (Revlon, AMC) are doing even more poorly than the median stock these days and redemption pressure may become significant. Given the NCIB is finished, I wonder if their block of AIM shares may not even become available for an interested taker.

[movys]

I spoke with the CFO a few days ago and thought I'd share the following takeaways:

 

1) They considered carefully the option of winding down ILS and liquidating the company but decided against it for a few reasons:

a) leaves the substantial value of the tax losses on the table

b) forgoes synergies that would be available with loyalty targets they might evaluate

c) an announced plan to liquidate substantially reduces their negotiating power with Aeromexico re PLM, as Aimia would effectively become a forced seller if they publicly committed to liquidating the company.

 

2) PLM - The relationship with Aeromexico is governed by two agreements (commercial agreement and shareholder agreement).  The commercial agreement has very firm parameters around it that make it impossible for Aeromexico to "break the contract and find a new partner" before 2030.  The exclusivity clause prevents such action and even if Aeromexico decided to go nuclear and risk a lawsuit over the issue, they would have to convince other Mexican entities (banks, partners, etc.) to do the same, who would all be subject to the same legal outcome.  Finally, as the majority partner, Aeromexico's interest is in increasing the value of PLM, not destroying it.  That they made an opportunistic offer to purchase Aimia's stake not long ago speaks volumes about their real intentions here.

 

The shareholder agreement grants Aimia major decision rights relative to the business.  Aimia has 3 of the 9 board seats and not much can be decided without them.  Based on this, the business is accounted for as under "joint control" under IFRS.  As part of the shareholder agreement, Aeromexico and Aimia review and agree on the dividend every quarter.  Again, if Aeromexico were to go nuclear and attempt to deprive Aimia of the dividend as a negotiating tactic, the cash would be suspended inside PLM and Aeromexico would have to do without it as well.  Aeromexico's weak balance sheet suggests they need the PLM dividend just as much, if not more, than Aimia. 

 

3) CDLX - while Aimia cannot compel a follow-on offering, they do have participation rights should CDLX do a follow-on of their own volition, which seems to be in the cards given their recent decision to file the S-3.  However, there is nothing preventing Aimia from selling in the open market today.  Aimia views CDLX as a non-core asset, and while they don't need the cash currently, they recognize that the worst time to monetize an asset is when they NEED cash, and they have no intention to "play the stock market."  The CFO assured me that it is not lost on them that their stake in CDLX represents >1/3 of the value currently being ascribed to the entire company.  So my guess is monetization is a relatively near-term catalyst.  They also confirmed that no material capital gains taxes or other taxes would be due upon selling their stake in CDLX at current prices.

 

4) They recognize the urgency of reducing the cash burn, and the CFO reiterated the claim on the call that we will see a substantial reduction in cash outflow in the back half of the year.

 

5) As the stock price continues to become more attractive, the hurdle for sensible M&A implicitly rises, and if they are unable to consummate a deal at what they feel is a very attractive price (and something that is cash generative on day 1) relative to their own stock, they would consider repurchasing even more shares.

 

Obviously you can decide how you want to discount comments coming from within the organization, but I thought the commentary about PLM and the dividend, as well as CDLX monetization, was encouraging.

[Cigarbutt]

^Thanks for sharing movys.

I've been trying to kill this thesis (minimizing the positives and maximizing the negatives) but haven't succeeded yet.

 

2 additional points about PLM:

1-Looking across the airline industry, whether in-house proprietary, with some autonomy or completely separate businesses, loyalty units have become essential elements (this is really a long term and convincing story) with growing value (and big banks are really interested) and an interesting feature is the embedded asset-lite value to continue to contribute to cashflows during downturns. Here are two articles touching on this topic. The content is promotional and relatively one-sided and also contains misquoted information about the Aeromexico-Aimia joint partnership.

https://www.mba.aero/wp-content/uploads/2018/08/mba-Insight-Article-Frequent-Flyer-Programs-Oct-4-2017.pdf

https://www.mba.aero/wp-content/uploads/2018/08/Frequent-Flyer-Programs-Part-Two-1-1.pdf

 

2-I looked back old notes and re-read a document from 2012, which is no longer available on Aimia's corporate website. It shows how Aimia's input was instrumental in defining the trajectory that PLM has taken. Interestingly, Mr. Rabe was the PLM CEO then. Why did he leave? Did he outgrow the company or did Aeromexico think that they could fly on their own?

http://docplayer.net/35123595-Taking-club-premier-how-aimia-helped-aeromexico-optimize-its-loyalty-program.html

 

[wabuffo]

Thanks for the update from mgmt, Movys.

 

His answer on why not shutdown ILS is both self-serving and idiotic. 

 

It's also interesting that they acknowledge that Aeromexico has the power to turn off the dividend flow from PLM.  I take your points about why that wouldn't happen.  But wouldn't doesn't mean couldn't in this case of an aggressive strategy to force AIMIA's hand.

 

Also - on more buybacks, it was my understanding that AIMIA can't do another NCIB until after the anniversary of the one they just completed (but I could be wrong about that).  So they may be out of the market for awhile.  Not that their previous repurchases were astute anyway - so maybe this is good news.

 

wabuffo

[movys]

^Thanks for sharing movys.

I've been trying to kill this thesis (minimizing the positives and maximizing the negatives) but haven't succeeded yet.

 

2 additional points about PLM:

1-Looking across the airline industry, whether in-house proprietary, with some autonomy or completely separate businesses, loyalty units have become essential elements (this is really a long term and convincing story) with growing value (and big banks are really interested) and an interesting feature is the embedded asset-lite value to continue to contribute to cashflows during downturns. Here are two articles touching on this topic. The content is promotional and relatively one-sided and also contains misquoted information about the Aeromexico-Aimia joint partnership.

https://www.mba.aero/wp-content/uploads/2018/08/mba-Insight-Article-Frequent-Flyer-Programs-Oct-4-2017.pdf

https://www.mba.aero/wp-content/uploads/2018/08/Frequent-Flyer-Programs-Part-Two-1-1.pdf

 

2-I looked back old notes and re-read a document from 2012, which is no longer available on Aimia's corporate website. It shows how Aimia's input was instrumental in defining the trajectory that PLM has taken. Interestingly, Mr. Rabe was the PLM CEO then. Why did he leave? Did he outgrow the company or did Aeromexico think that they could fly on their own?

http://docplayer.net/35123595-Taking-club-premier-how-aimia-helped-aeromexico-optimize-its-loyalty-program.html

 

 

Thanks for sharing.  Note that in 2012 Aeromexico and Aimia agreed to a value for PLM of $518m (C$3.10/share today) when members and gross billings were HALF of what they are now.  Mexico's population and middle class are growing, credit card adoption is increasing, and PLM currently has only 5% penetration.  The growth runway here is long and even though everybody is using modest numbers for conservatism, fair value for PLM should really be north of $1B.

[movys]

Thanks for the update from mgmt, Movys.

 

His answer on why not shutdown ILS is both self-serving and idiotic. 

 

It's also interesting that they acknowledge that Aeromexico has the power to turn off the dividend flow from PLM.  I take your points about why that wouldn't happen.  But wouldn't doesn't mean couldn't in this case of an aggressive strategy to force AIMIA's hand.

 

Also - on more buybacks, it was my understanding that AIMIA can't do another NCIB until after the anniversary of the one they just completed (but I could be wrong about that).  So they may be out of the market for awhile.  Not that their previous repurchases were astute anyway - so maybe this is good news.

 

wabuffo

 

Agree on his ILS answer.

 

I wouldn't say it's as simple as Aeromexico having the "power" to turn off the div.  It's a board-level decision that requires the support of Aimia and I'm not even sure how Aeromexico could mechanically pull it off.  Probably involves their suing Aimia for these "irregularities."  But the time for that has passed.  Aeromexico had a shot at "forcing Aimia's hand" when the cloud of the Aeroplan redemption liability was still hanging over their head.  They took that shot and failed.  Now that Aimia is cash rich (and about to become cash richer when they monetize CDLX), I don't think Aeromexico has any leverage anymore.

 

On the buyback, you are correct about the rules regarding an NCIB, but they can initiate another SIB at anytime.